From the meaning of public offering to IPO investment: How to develop a successful investment strategy

What is an IPO? An IPO, Initial Public Offering, refers to the process where a company transitions from being private to a publicly listed company and offers its shares to the general public for the first time. An IPO is more than just a fundraising method; it is a significant financial event that opens new profit opportunities for investors. Understanding the precise meaning of IPO is the first step toward making successful investment decisions.

Companies utilize funds raised through IPOs for various purposes such as research and development, market expansion, and debt repayment. From an investor’s perspective, there is a potential to enter at undervalued prices during the initial listing and profit as the company grows. However, these opportunities come with high volatility and risks.

Understanding the Basic Mechanism of Going Public

( Meaning of IPO: The Actual Process of Going Public

The process of creating an IPO involves several stages. First, the company determines the amount of capital needed for listing, the number of shares to issue, and the timing of the listing. It then selects a global investment bank like Goldman Sachs or Morgan Stanley as the lead underwriter. The underwriter manages the entire IPO process, including company valuation, setting the offering price, and attracting institutional investors.

Next, the company submits an application for preliminary review to the Korea Exchange)KRX### and files a securities registration statement with the Financial Supervisory Service. Financial statements, business models, risk factors, and other information are disclosed to investors, and demand forecasts are conducted with institutional investors. This process determines the final offering price.

When individual and institutional investors apply for subscription, the number of shares allocated depends on the competition rate. In cases of high demand, some shares are allocated via lottery. Ultimately, the securities exchange begins official trading, and the first-day stock price can differ significantly from the IPO price based on market expectations.

( Companies and Investors: Their Profit Structures

From a company’s perspective, an IPO offers strategic value beyond capital raising, such as enhancing credibility and attracting talent. Listed companies are required to disclose financial information regularly, which helps build trust with investors and customers. Additionally, stock options can be used to attract and retain talented personnel.

For early investors, IPOs provide an exit opportunity. Venture capital)VC### or private equity funds(PEF) can sell their holdings in the market to recover their investments through IPOs.

The Bright and Dark Sides of IPO Investment: Opportunities and Risks

IPO investments often offer the chance for stock prices to surge sharply from the IPO price, providing substantial profit opportunities. Many newly listed companies show high growth rates initially, making them attractive for long-term investors.

However, price volatility can be extreme, and if market outlooks or actual performance differ, there is a risk of rapid stock price decline. Lock-up(Lock-up) periods restrict early investors from selling their shares for a certain time.

( Main Advantages of IPOs

High Profit Potential - Airbnb, for example, closed its first day at $146 after an IPO price of $68 in 2020 during the COVID-19 pandemic, rising 115%.

Opportunity to Enter Growth Industries - Tesla was listed at $17 in 2010 and, with the growth of the electric vehicle market, maintains around $400 as of)2024###, delivering over 350 times return to early investors.

Transparency of Information - Post-listing, companies must regularly disclose financial reports, enabling investors to evaluate performance more transparently.

Portfolio Diversification - IPOs offer opportunities to include emerging companies and innovative industries in existing portfolios.

( Main Risks of IPOs

High Volatility - Stock prices can plummet sharply contrary to initial investor expectations.

Information Constraints - Before listing, company information is limited, making accurate valuation difficult.

Market Dependency - For emerging industries or startups, high market uncertainty can lead to significant losses.

Allocation Difficulties - Popular IPOs often have high subscription competition, making it hard to secure desired quantities.

Learning from Actual Success and Failure Cases

) Success Stories: Models of Long-term Growth

Alibaba###2014 IPO### - As a leading Chinese e-commerce company, Alibaba’s IPO was priced at $68 and closed its first day at $93, up 37%. Its market capitalization surpassed $200 billion, marking long-term success.

Common traits of these companies include solid financial structures, clear business models, and belonging to high-growth industries.

( Failure Cases: Signals Investors Should Avoid

WeWork)2019 Failure( - Valued at over $47 billion, but due to excessive spending and internal management issues, it lost investor confidence. The IPO was canceled, and it filed for bankruptcy in 2023.

Roblox)2021 IPO### - Listed at $45 and surged to $77 initially, but due to increased competition and poor performance, its stock has fallen over 50% from the IPO price.

K-Bank(2024 Failure) - Low interest from institutional investors and concerns over overvaluation led to postponement of the listing as the IPO price could not be finalized.

Characteristics of the Global IPO Market and Investment Strategies

( Korean IPO Market Status

Korea’s IPO market is rapidly growing, with innovative companies in fintech, biotech, and other sectors gaining attention. Government policies supporting startups and increased venture capital investments are promoting IPO activity.

However, investors should consider complex procedures, taxation on dividend income, and barriers for foreign investors.

) US IPO Market: The Global Hub

NASDAQ(NASDAQ) and NYSE###NYSE### are the world’s most active IPO markets, especially for tech and biotech firms. Major unicorns like SpaceX and Stripe are scheduled to go public.

High liquidity is an advantage, but volatility and fierce competition are challenges. Strict regulations and disclosure requirements from the US Securities and Exchange Commission(SEC) must also be considered.

( Hong Kong IPO Market: Gateway for Chinese Companies

Hong Kong serves as a key financial hub for Chinese companies listing abroad. Large firms like Alibaba are listed there, benefiting from high liquidity and an international investor-friendly environment.

However, policy changes in China, data regulations, geopolitical risks, and industry concentration risks require careful monitoring.

Practical Strategies for Successful IPO Investment

) Step 1: Thorough Analysis of Company Financials

The foundation of IPO investment is analyzing the company’s financial health. Focus on profitability, debt ratios, cash flow, and growth trends.

Financially stable companies with high growth potential are more likely to sustain stock price increases post-IPO. Apple and Microsoft, for example, had robust financials and innovative product lines at listing, forming the basis for long-term success.

It is essential to comprehensively analyze the prospectus(Prospectus), management backgrounds, media reports, and past corporate performance.

Step 2: Industry Outlook and Market Environment Evaluation

The industry in which the company operates is also a critical factor. Companies in high-growth sectors like AI, cloud computing, and biotech are more likely to sustain growth after IPO.

Conversely, companies in traditional retail or wired communications may face growth stagnation. Utilizing research reports and market data is effective.

Additionally, during rising interest rates, growth stocks may decline, so macroeconomic conditions should be considered.

Step 3: Verification of Management Capabilities

Management experience, leadership, and past achievements significantly influence future growth. For startups and new companies, management quality can determine success or failure.

Careful review of executives’ industry experience, previous successes, and current team composition is necessary.

Risk Management to Maximize Profitability

( Capital Allocation: Strategic Capital Distribution

Funds allocated for IPO investments should be a portion of the overall portfolio. While IPOs can offer high returns, they also pose the risk of significant losses.

Investors should plan their IPO funds in advance and invest within a loss-tolerance range.

) Diversification: Portfolio Stabilization Strategy

Rather than investing heavily in a single IPO, diversifying across multiple IPOs reduces risk. Investing across various sectors like technology, healthcare, finance, and energy minimizes losses from sector downturns.

Diversification enhances portfolio stability and long-term profitability.

Monitoring Market Sentiment

Investor sentiment tends to drive sharp increases in IPO stock prices during optimistic periods, but the opposite can lead to declines. Continuously monitoring sentiment indicators, economic news, and industry trends is crucial.

Mindset of a Wise Investor Who Understands the Meaning of IPO

Going public is not just about rapid stock price increases. IPO investment offers significant opportunities for both companies and investors but involves high volatility and risks.

Investors must thoroughly understand the meaning of IPO, analyze financial health, industry outlook, and management capabilities. Employing diversification and capital management strategies helps minimize risks and leverage long-term opportunities.

Since IPO markets vary across Korea, the US, and Hong Kong depending on economic and policy factors, close attention to market conditions and regulatory changes is essential. Consulting with investment professionals to tailor strategies aligned with personal goals and risk tolerance can turn IPO investing into a promising long-term opportunity.

Approaching with accurate information, cautious analysis, and systematic strategies unlocks the true value of IPO investments.